Jefferies Downgrades Palantir (PLTR): 65% Downside Risk with Expensive Valuation Amid Slower Growth Concerns
Jefferies Issues Strong Warning on Palantir Stock, Predicts 65% Downside Risk
Palantir Technologies (NASDAQ: PLTR) has been facing significant headwinds, and now Jefferies is raising concerns about the stock’s future. The investment bank recently reiterated its Underperform rating on Palantir shares, setting a price target of $28, which implies a 65% downside risk from current levels.
Challenges Ahead for Palantir in Q4 2024
According to Jefferies analysts, Palantir’s outlook for the fourth quarter of 2024 looks increasingly challenging. The company is expected to lap tough year-over-year comparisons, making it more difficult to impress investors in the coming earnings report. Analysts pointed out that Palantir is the most expensive stock in the software sector, with a 50x multiple on its next twelve months (NTM) revenue, which is more than double that of its closest peers.
As the company faces the fourth-quarter setup, it could see further compression of its valuation multiple if its growth fails to accelerate. The analysts believe that if the company fails to demonstrate sustained growth in Q4, its already inflated multiple could face additional pressure.
Stock-Based Compensation and Dilution Concerns
Jefferies also highlighted the issue of stock-based compensation (SBC), noting that Palantir has accelerated approximately $120 million in SBC related to market-vesting stock appreciation rights (SARs). These SARs became more valuable as Palantir’s stock price surged above $50 per share. As a result of this, Jefferies has revised its fourth-quarter GAAP earnings per share (EPS) estimate down to $0.01, down from $0.06, although its non-GAAP EPS estimate remains unchanged. Additionally, the bank raised its share count to 2.488 billion, up from 2.474 billion, to account for dilution caused by these SARs.
Palantir’s Growth Expectations vs. Valuation
One of the major concerns from Jefferies is Palantir’s lofty valuation. The analysts suggest that even if the company manages to accelerate growth to 50% over the next four years, it would still need to trade at an extraordinarily high multiple to justify its current stock price. This scenario would make Palantir’s stock among the richest in the software industry, and analysts believe such a valuation may not be sustainable.
Jefferies also observed that Palantir’s enterprise value (EV) to NTM revenue multiple has already compressed by 5% year-to-date. This comes after a staggering 282% expansion in 2024, reminiscent of the Covid-era stock boom when high-growth companies saw massive multiple expansions. With the market now maturing, Jefferies sees Palantir facing tougher conditions ahead, particularly as interest rates and economic growth factors evolve.
What’s Next for Palantir Stock?
Despite Palantir’s solid fundamentals, the analysts are cautious, suggesting the company needs to accelerate its growth in a sustainable manner to avoid further valuation compression. If the company fails to show signs of robust growth in Q4 and beyond, its already-high stock price could face additional downward pressure, as it would be difficult to justify the current multiple without significant growth.
In a “what if” scenario, Jefferies illustrates that even Palantir’s strong growth would not be enough to support its valuation unless the stock continues to trade at one of the highest multiples in the software industry for the next four years.
As investors brace for the potential impact of slower growth and valuation headwinds, Palantir’s stock faces a rocky road ahead. Will the company meet its growth targets, or will the challenging economic conditions cause further contraction in its stock price?
Stay tuned for more developments, as Palantir’s performance in the coming months will be critical in determining its future trajectory.
